*Note: This is an estimate based on a standard 36% Debt-to-Income (DTI) ratio. Actual bank approvals consider credit scores, employment history, and property taxes.
Understanding Home Loan Pre-approval
A home loan pre-approval is a preliminary evaluation by a lender that determines how much money you can borrow to purchase a property. This calculator uses your Gross Annual Income and Monthly Debts to estimate your "Buying Power" based on common lending guidelines.
Key Factors in the Calculation
Debt-to-Income (DTI) Ratio: Most lenders prefer a total DTI of 36% or less. This means your total monthly debt payments (including your new mortgage) should not exceed 36% of your monthly gross income.
Front-End Ratio: Lenders often look for a mortgage payment that is roughly 28% of your gross monthly income.
Down Payment: The cash you bring to the closing table directly increases your total purchase price potential.
Interest Rates: Even a 1% change in interest rates can significantly impact how much home you can afford.
Example Scenario
Imagine a couple earning $100,000 per year with $400 in monthly car payments and $40,000 saved for a down payment.
Monthly Income: $8,333.
Max Total Debt (36%): $3,000 per month.
Available for Mortgage: $3,000 – $400 (existing debt) = $2,600.
Buying Power: At a 6.5% interest rate, a $2,600 monthly payment supports a loan of roughly $411,000.
Total Price: $411,000 + $40,000 down payment = $451,000.
Why Get Pre-approved?
In a competitive real estate market, a pre-approval letter is essential. It proves to sellers that you are a serious buyer and that you have the financial backing to complete the purchase. It also helps you narrow your home search to properties that fit within your realistic budget, preventing disappointment later in the process.
function calculatePreApproval() {
var annualIncome = parseFloat(document.getElementById('annualIncome').value);
var monthlyDebts = parseFloat(document.getElementById('monthlyDebts').value) || 0;
var downPayment = parseFloat(document.getElementById('downPayment').value) || 0;
var annualRate = parseFloat(document.getElementById('interestRate').value);
var loanYears = parseFloat(document.getElementById('loanTerm').value);
if (!annualIncome || !annualRate || !loanYears) {
alert("Please enter valid income and interest rate values.");
return;
}
// 1. Calculate Monthly Gross Income
var monthlyIncome = annualIncome / 12;
// 2. Calculate Max Monthly P&I Payment (36% DTI Limit)
// Formula: (Monthly Income * 0.36) – Monthly Debts
var maxMonthlyBudget = (monthlyIncome * 0.36) – monthlyDebts;
// If debts are too high relative to income
if (maxMonthlyBudget <= 0) {
alert("Your monthly debt is high relative to your income. Lenders may require a lower debt-to-income ratio.");
return;
}
// 3. Solve for Loan Amount (Present Value of an Annuity)
// Formula: PV = PMT * [(1 – (1 + r)^-n) / r]
var periodicRate = (annualRate / 100) / 12;
var numberOfPayments = loanYears * 12;
var loanAmount = maxMonthlyBudget * ( (1 – Math.pow(1 + periodicRate, -numberOfPayments)) / periodicRate );
// 4. Calculate Total Purchase Price
var totalPurchasePrice = loanAmount + downPayment;
// Format results
var formatter = new Intl.NumberFormat('en-US', {
style: 'currency',
currency: 'USD',
maximumFractionDigits: 0
});
document.getElementById('resPurchasePrice').innerHTML = formatter.format(totalPurchasePrice);
document.getElementById('resLoanAmount').innerHTML = formatter.format(loanAmount);
document.getElementById('resMonthlyPayment').innerHTML = formatter.format(maxMonthlyBudget);
document.getElementById('resultsArea').style.display = 'block';
document.getElementById('resultsArea').scrollIntoView({ behavior: 'smooth', block: 'nearest' });
}